Are rents about to fall?

Are rents about to fall? Landlords have been insulated from many of the harsh economic winds since the economic fall out. Many of us have benefited from the ‘double whammy’ of ‘beautiful’ base rate linked mortgages and rising rents. Music to my ears! I’ve just completed my belated tax return for 2011-2012 and it shows that I’ve generated a livable wage just from my rental profits.

Does this make me a professional landlord? Well I guess it does until interest rates return to a reasonable level. According to the latest projection this may not be for at least another 5 years. Great! That gives me a chance to build up my other revenue streams and also pay back some of my BTL mortgage debt.

The ‘fly in the ointment’

Rental levels have been a one-way bet over the last 5 years. A combination of generous housing benefits for some landlords targeting tenants on benefits. At the same time, many London landlords have gained from growing demand and limited rental stock.

In general we have seen the emergence of ‘generation rent’. These are the aspirant youthful ‘middle class’ who in days gone day would have been a first time buyer (FTB). A combination of restrictive lending following the financial fallout and rising debt and falling job prospects for the twenty something has resulted in them being perennial renters, well into their thirties. The current average age for a FTB is now 37. To think I entered the housing market at the tender age of 22, which back in the 80’s was not unusual – today it would be remarkable. We have also seen a rapid rise in the student population and strong demand from students that has again contributed to rising rents in certain university towns.

However, rental increases have been selective. For many landlords outside London, out in the provinces and away from University hotspots or city centre locations favoured by ‘generation rent,’ they have experienced little or no rental increases.

Are rents set to fall?

The latest statistics from Property Hawk’s rental index show that after years of steady rental increases, rents have ‘flat lined’ over the last year and are up less than 1%. They are in fact down by more than 1% over the last 6 months. Worryingly, we have not seen much of the strong seasonal up turn in rents that are typical from April onwards. There are a number of factors that may suggest that the strong rental rises that have seen average monthly rent rise from £560 in early 2008 to over £620 in the Autumn of 2012 may have come to an end.

Reasons why rents could fall

There are a number of recent developments that might explain the stagnation of rents over the last 6 months.

1. Student rental demand has fallen after general student numbers have fallen and increasingly mature and foreign students opt for purpose built high spec student accommodation rather than the more traditional shared student houses.

2. The slow easing of the credit crunch over the last few years has meant that residential mortgages have been increasingly accessible and affordable. This has stimulated demand amongst the first time buyer end of the market reducing the size of the pool of ‘generation rent’.

3. The latest changes to housing benefit is meant to at least cap or preferentially reduce the housing benefit bill. These changes will inevitably impact on tenant affordability for those at the bottom end and thereby have a deflationary impact on rents.

4. Falling real incomes in the UK means that people have less money to spend. This will reduce their ability to finance future rental rises. Unless real incomes start to rise then rental affordability will become increasingly an issue for landlords.

What does this means for landlords?

The reasons I have highlighted for rental falls may still not be sufficient to counteract the continued strong demand for rental property. However, what it does highlight is that landlords can’t rely on inexorably rising rents in their business model. Remember, pre-credit crunch the unwritten rule was that house prices only ever go up. The reality is that things that go up can also go down!
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